India Inc partners PE funds for acquisitions

December 28, 2009 12:16 IST

At a time when merger and acquisition (M&A) activity is still recovering, companies are finding solace in private equity (PE) funds for acquisitions. And, PE funds seem keen to participate in such deals.

Experts say PE funds, as a class of financial investors, are not just acting as a source of funding for companies but also bringing much-needed insights for doing a global deal.

Recently, Mahindra & Mahindra, in partnership with Kotak Private Equity, acquired majority stakes in two Australia-based aerospace companies, Aerostaff Australia and Gippsland Aeronautics. The total deal size was Rs 175 crore (Rs 1.75 billion). Kotak PE is bringing in Rs 150 crore over three years and are also involved in evaluating and structuring of the transaction.

Nitin Deshmukh, CEO of Kotak PE, said: "This is a completely new space we were looking at, so we wanted a partner with very strong manufacturing capabilities, engineering skill sets and high on innovation. The IRR expectations remain the same, as a normal private equity deal."

While there are not many examples of PE-backed acquisitions, analysts say there will be an increase in this sort of activity. Many PE funds said they were looking at such transactions, but refused to divulge details.

Ashutosh Agarwala, Chief Financial Officer, GMR Infrastructure, says, "A lot of companies have learnt lessons from the debt-led acquisitions of 2006-07. Some of them were highly leveraged, resulting in repayment pain for promoters. Hence, it makes sense to get a private equity fund which can add value, as well as bring cash for the acquisition. It depends on the company also, as to what type of risk they want to assume on their balance sheet."

He added, "While things may seem hunky-dory, it's not easier to raise funds, as it is perceived to be. Liquidity in the banking system is good but markets have still not stabilised enough. It will be some time before things start looking good on the IPO markets. We are evaluating various options, including private equity. However, it has to meet our requirements."

In 2008, a consortium of Mahindra & Mahindra and ICICI Venture Funds had acquired 100 per cent stake in Italy's MetalCastello, a leading Italian independent gear manufacturer. Globally, too, companies teaming with PE funds for acquisitions are usual. But, more than that, it is buyout funds globally who look at such deals. In India, the buyout market is still nascent, and present ample opportunities for even growth capital funds to partner companies in their global ambitions.

"There have been cases when companies have taken PE funding and have then used it for doing acquisitions. This is quite unusual but shows the flexibility of PE as a source of capital. It makes sense for the corporate to get a PE fund because the risk is shared between two parties. While acquiring a new asset, there are several kinds of risks the company has to undergo, which can be mitigated by bringing in a partner. For a private equity, it makes sense if they can derive value from a particular transaction leveraging on the skill sets of the corporate," said Srinivas Chidambaram, Managing Director, Jacob Ballas India Fund.

Although companies with their expertise on a particular business and operational understanding are better placed to do acquisitions, PE funds come into play with quicker availability of funds and assistance in terms of synergies with their global investments. In India, with restrictions on bank financing, it becomes all the more important.

Bijal Doshi, Executive Director, Euromax Capital, who is working on some such deals, said: "These types of funding are generally done through an SPV (special purpose vehicle) in which the dilution of stake is lower for a promoter as compared to the parent company. There is much more surety in terms of getting the funds and industry knowledge if the PE operates in a particular sector."